Last week, my Devil’s Advocate post argued against saving for retirement because the stock market is a big Ponzi scheme. While that’s a cynical way of looking it, the reality is that the market does rely on more investors putting more money into the system. When people start pulling money out, and not reinvesting it elsewhere, values have to go down because demand is lower. It’s a gross oversimplification, I admit, but it’s valuable in helping us understand that argument.

It turns out that the Federal Reserve Bank of San Francisco, as reported by Bloomberg, has come to the conclusion that stock market values are likely to be depressed as baby boomers, those born between 1946 and 1964, start to retire. As they pull out their funds to help pay for retirement, the market will see “depressed” values as a result. And if you think that demand will be replaced by foreign investors – turns out their in worse shape:

“For many primary purchasers of U.S. equities outside the U.S., their demographics are even worse than ours, in particular Europe and Japan, which have older age profiles prevailing than the U.S. does,” Spiegel, vice president of the bank’s research department, said in a telephone interview today.

I’m not an investing guru and I don’t have any advice (I’m doing exactly what I’ve been doing for the last ten years), but this does fortify the Devil’s Advocate argument, doesn’t it?

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16 Responses to “Baby Boomers Retiring May Depress Stock Market”

This was already mentioned in the comments of the “Devil’s Advocate” article, but it applies here as well: dividends. Without them, you’re correct in saying that baby boomers pulling out of stocks can cause a drop in the market. Dividends, however, are not affected by this so you can continue to be paid well through the stock market with a strong dividend account. If you’re investing for retirement, I really don’t see why you would invest in any stock that doesn’t pay a dividend? In addition, if the majority of invested baby boomers are smart, their retirement should be based on dividends or some sort of steady income (annuity, IRA), so they really won’t be pulling too much money out of stocks, and definitely not quickly.

Very true, I think dividend stocks are going to be less affected than others. Why would near-retirees be invested in anything else? They may have bought into growth or blue chip stocks when they were 20 or 30 or 40 and are now selling in order to fund their other needs.

All you ever hear about the baby boomers is doom and gloom regarding how little they have saved for retirement (wasn’t the statistic something like 1/3 only have their net worth in their primary residence?) Besides, they’re not selling all their stocks at once. I’m more worried about another dip in the housing market as they access their home equity and/or trade down to smaller places.

I agree, the argument is that this is more of a slow drag and not some big drop in the future. The big drops will come because some fears are realized about a double dip recession or a further weakening of the housing market (more likely, something tragic happening with Fannie/Freddie).

This might be a concern if the baby boomers planned to pull their money out of the market and do nothing with it, but this is not the case. One of two things will happen with the money that boomers pull out. They will either spend the money on consuming goods/services, further driving the profitability of companies and stock prices. Or more importantly, will eventually transfer any residual wealth to the next generation who will use the money to consume goods/services, build businesses, or invest for their future through mutual funds/stocks/etf’s etc.

The flip side of this situation is that if baby boomers have saved inadequately for retirement, they may suddenly “get religion” and start saving the way older generations did. That could reverse the Fed projection.

Of course, they’d probably do it at the expense of consumption, which would mean other “issues” for the stock market. But fresh inflows would keep it moving higher, long term.

Yeah, as others have said there are two main problems with this. First, Baby Boomers as a whole haven’t really saved that much for retirement so I don’t think you can count on that demographic to have much of an impact on the market anyway. Second, even the ones who have invested aren’t going to suddenly sell all their stocks at once – it will be little by little. And even that shouldn’t cause a long term drag because it’s not like 100% of their portfolio is in stocks (at least it shouldn’t be if they have a lick of sense to them…).

I wouldn’t give this argument much merit. It’s just more doom and gloom.

I don’t have the stats, but I would speculate that some (if not most or all) of the retirees are being replaced with high school/college grads joining the workforce. Maybe, for each retiree that takes money out of his account, a new 401k or IRA is established and a new contribution is being added to the system. 5M baby boomers retiring to 5M grads per year… just a guess. Does anyone know these stats? At any rate, this should further reduce the impact of baby boomers retiring.

- Boomers are spread over 20 years.
- Many boomers haven’t saved much.
- A lot of people keep their retirement in stocks even though they should put it in safer investments like bonds.
- Boomers are a relatively small % of the total population.
- The baby boom was big compared to other generations but its not like it dwarfs the other generations. e.g. baby boomers are about ~25-30% of the population and gen x is about ~20-25%.
- Older generations would have had the same impact to a lesser extant so its not as if this is anything new or unique.

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